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05/27/2006

Are CEOS Overpaid, a Response-BECKER

I will address several good comments. I do not believe that compensation should be tied exclusively to performance because most CEOs, along with other employees, have a preference for a minimum stable income. But I do agree that performance-based compensation should be the major component, especially for large companies. In fact, there has been a sharp growth over time in the share of the total compensation of CEOS that is based on performance.
Several of you confused substantial deviations between compensation and performance during any year in some companies with what determines why average CEO pay increased so much over time-six fold, in fact. That is the main problem I address. Unless the frequency of mismanagement grew over time, the evidence on mismanagement for any year cannot explain the growth in pay over time.
Yes, not only CEOS but other high level executives are much better paid in the U.S. than elsewhere. The reasons for this are closely related to why American CEOS are so much better paid than elsewhere.
Samantha Joy, there is no contradiction between these two sentences: "The usual explanation given by economists for the positive relation between compensation and firm size is that the largest companies attract the best management. Therefore, bigger companies have to pay their CEOS better. [and} ‚Ä¶the relation between pay and (company) size is likely to be sizable, even when top management in different sized companies do not differ greatly in skills and abilities. I want to emphasize the word "greatly". Small differences in ability have large effects on productivity in large companies, and hence have large effects on compensation. This is related to the "superstar" phenomena emphasized by my late colleague, Sherwin Rosen.

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Re: "Several of you confused substantial deviations between compensation and performance during any year in some companies with what determines why average CEO pay increased so much over time-six fold, in fact. That is the main problem I address. Unless the frequency of mismanagement grew over time, the evidence on mismanagement for any year cannot explain the growth in pay over time."

Even if frequency of mismanagement does not increase, higher potential for mismanagement over time could explain the growth in CEO pay.